Neptune Changes Orbit

Nortel Networks Ltd. is shifting gears with its MPE 9000 router line, targeting wireless and voice-gateway territory rather than the ballyhooed multiservice edge.

The company says the MPE 9000, previously code-named Neptune, hasn't been discontinued, and that the system began shipping in general availability last quarter. But in reviewing R&D priorities, Nortel didn't like its chances in the carrier multiservice edge -- an area dominated by Cisco Systems Inc. (Nasdaq: CSCO) and, more recently, Alcatel (NYSE: ALA; Paris: CGEP:PA).

The news came to light in a note issued this morning by analyst Chris Umiastowski of TD Newcrest (a division of TD Securities). He called the move "disappointing but not entirely unexpected."

The MPE 9000 was a colossal effort by Nortel, requiring a year's work from a 250-engineer team that started from scratch. The idea was to incorporate Layer 2 functions -- as Nortel's Passport and Shasta lines did -- while adding strong Layer 3 support, a combination that carriers were demanding at the time.

Originally slated for 2004 shipment, the MPE 9000 had been hampered by delays. (See Nortel's Neptune Surfaces, Neptune Arrives, and Neptune Nears Earth.) The product did reach general availability last quarter, says Jake Power, Nortel senior manager of product marketing.

Nortel is characterizing the move as a prioritization matter, noting that development work on the product is being shifted to emphasize wireless and voice markets rather than data routing. Officials say that while the MPE 9000 was developed as a data router, Nortel's other goal "was always for it to be a platform to the company," Power says.

"The market window on the carrier data piece was closing a little bit quicker than we could address it, and although we could have been a market leader there, it would have taken time. We're trying to focus on where we think we can lead in the near term."

Nortel is "redeploying" some employees as a result of the changes, but no layoffs are yet planned, Power says.

Umiastowski noted that the move might signal an effort by new CEO Mike Zafirovski to reconsider Nortel's R&D spending. "If Nortel has to take some bad press to refocus its R&D dollars in a more effective way, so be it. It's probably the right move," Umiastowski wrote. (See Nortel's New Faces Face Tough Task.)

The MPE 9000 has already shipped into a wireless core network. A voice-gateway version of the product is on the way, probably appearing under its own brand name, Power says: "That's just a market timing thing. If you look at media gateways, the timing is further out than for some of the wireless applications."

The MPE 9000 emerged in 2004 when multiservice edge routers were all the rage. Companies including Alcatel, Ciena Corp. (NYSE: CIEN), ECI Telecom Ltd. , and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) got into the game via acquisition, while others such as Cisco, Nortel, Hammerhead Systems Inc. , Juniper Networks Inc. (NYSE: JNPR), Lucent Technologies Inc. (NYSE: LU), Redback Networks Inc. , and Riverstone Networks Inc. (OTC: RSTN.PK) offered their own boxes for the market.

It was all part of the carrier trend toward network convergence, putting all traffic onto a single core based on Internet Protocol (IP) and Multiprotocol Label Switching (MPLS). The multiservice edge router was to be the box channeling these different traffic types onto that core.

But the multiservice market has changed during the past year. An obsession with IPTV has brought Ethernet to the fore, as the service is likely to require virtual truckloads of Gigabit Ethernet feeds to be shunted around the edge network.

Under the new IPTV assumptions, Alcatel has built an apparent lead with its 7750 and 7450 routers, based on technology acquired with TiMetra Networks. (See Alcatel Router Revenues Surge.)

Market changes weren't the sole source of Neptune's woes, however. The box reportedly was felled by technical problems that led to delays in shipment. While one source last year pointed to hardware difficulties delaying the MPE 9000, Umiastowski believes software was the culprit.

"We have not been able to confirm these details entirely, but we suspect that Nortel may not have been able to get an adequate software feature set to work in order to be competitive with the other players in the market," he wrote in today's note.

At this point, Umiastowski suggests Nortel should "just stay away" from carrier routers, given that the company lags competitors too much. "By contrast, the enterprise router market continues to be an opportunity for the company. Convergence is clearly happening in the enterprise (VOIP is a big driver here), and Nortel is fairly well positioned given its legacy voice strengths."

Nortel also continues to make carrier Ethernet a priority, Power says.

Umiastowski doesn't expect the Neptune news to affect Nortel's stock much, as the product's delays left investors with low expectations. Nortel stock was down 10 cents (3%) at $3.04 early this afternoon.

— Craig Matsumotowski, Senior Editor, Light Reading

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